Second Circuit Weighs Whether Bristol-Myers Delayed Cancer Drug

FDA drug approvals during the Covid-19 pandemic fueled questions from the Second Circuit on Friday in a shareholder class action alleging Bristol-Myers Squibb Co., misled them about a payout dependent on the approval of cancer drugs.

At issue before a three-judge panel in the US Court of Appeals for the Second Circuit is whether a lower court was right to toss a class action alleging Bristol-Myers misled investors about a payout. The payment was dependent on the Food and Drug Administration’s approval of three cancer therapy drugs—Liso-cel, Idecel, and Ozanimod—tied to Bristol-Myers’ 2019 acquisition of another pharmaceutical company, Celgene.

Bristol-Myers agreed, as part of its multibillion-dollar merger with Celgene, to issue contingent value rights to Celgene shareholders that would pay out $9 per CVR—$6.4 billion in total—but only if all three of Celgene’s milestone drugs received FDA approval by certain dates.

A CVR is a security payable only if a future event occurs.

The FDA approved one of the three drugs after the deadline—the lymphoma drug Liso-cel. The CVRs then expired and were considered worthless.

The investors alleged Bristol-Myers slow-rolled the FDA approval process in order to avoid making payments under the CVRs.

Michael B. Eisenkraft, who represents the investors and is a partner at Cohen Milstein Sellers & Toll PLLC, said that while Bristol-Myers used the pandemic to support why the FDA approval was delayed, “Bristol was doing many other drug approval processes during the same time period.”

“Covid didn’t fail to fill out the application properly. Covid didn’t assign a junior person to a senior person’s job,” Eisenkraft said. “It was just this one drug that suffered mishap after mishap.”

But Judge Pierre N. Leval, appointed by President Bill Clinton, wasn’t too convinced by Eisenkraft’s Covid-19 argument.

“I’m not sure I find what you’re saying now very persuasive,” Leval said. “Covid turned everything upside down. People were no longer working in the offices during Covid. People were working from home. They were dispersed. The amount of dislocation that Covid caused is hard to describe.”

Bristol-Myers argued that the FDA ultimately approved all three drug applications during disruptions from the pandemic. The agency approved the Liso-cel application 36 days after its Dec. 31, 2020, milestone date, and therefore, the CVRs expired without value in accordance with their terms.

“Do we feel good about the process? Yes, we got it approved. Was it approved by December 31? Unfortunately not. Why? Because of Covid,” said John J. Clarke Jr., a partner at DLA Piper LLP representing Bristol-Myers. “BMS was candid. It kept the market informed of developments.”

The US District Court for the Southern District of New York in March 2023 dismissed the class because the investors failed to plead scienter, which would have shown that the company or its officers intended to deceive, manipulate, or defraud.

The investors filed an amended complaint, which alleged violations of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5, but that claim was dismissed in March 2024 because there was still no showing of scienter.

Bristol-Myers argued that the lower court’s decision was right because the investors could not specify how the statements they challenged were false or misleading.

But Leval said the relationship between scienter and falsity is “unusual” in this case because “the falsity and the scienter are identical to one another.”

Leval also said he couldn’t agree with Bristol-Myers’ claims that the investors haven’t alleged any contrary fact.

“The contrary fact that they’re alleging is the intention not to have the prospect where they say we’re on track and we’re working closely with the FDA to get it done on time.”

Chief Judge Debra Ann Livingston, appointed by President George W. Bush, and Judge Alison J. Nathan, appointed by President Joe Biden, also sat on the panel.

The case is SM Merger/Arbitrage, L.P. v. Bristol Myers Squibb Co., 2d Cir., No. 24-826, oral argument 10/25/24.